Business Credit Article #2

5 Big Mistakes to Avoid When Building Business Credit

There are countless entrepreneurs today operating their businesses in a manner that puts them at great personal risk-risk of being hounded by creditors, poor financing offers on new cars, and even losing their homes. The risk stems from poor money and credit management.

Many business owners are completely unaware of the mistakes they are making, and those who are aware may not understand what they need to do to change. Fortunately, the answer to these problems is simple: avoid these 5 Big Mistakes and start paving the way toward building good business credit, with little or no personal risk.

Mistake #5: Putting Personal Assets at Risk

If you personally guarantee any credit extended to your business, you seriously risk your personal assets, such as your car, savings account, and your home. The most common way entrepreneurs fall into this trap is by setting up their businesses as a Sole Proprietorship. If you have not set up your business as a C-Corporation, S-Corporation or a LLC, then you most likely do not have a tax i.d. number; instead your business is tied to your social security number. This also means you do not have the legal means to separate your corporate credit from your personal credit. If you incorporate your business, you can protect yourself from personal liability.

Mistake #4: Not Paying Bills on Time…100% of the Time

Everyone who has some type of credit file also has a credit history attached to it, and having just one late payment on a line of credit can be held against you for years. This is vital information for entrepreneurs who are working toward building good business credit. Even if you have separated your personal and business credit lines, one late personal payment could affect your corporate credit, and your business’s growth.

Mistake #3: Not Building Corporate Credit the Right Way

Incorporating your business should be a first step toward separating your personal credit from your business credit, but it does not automatically qualify you for corporate credit. Your goal for building business credit is to secure lines of cash credit, not just vendor credit. You will need money to grow your business, and lots of it. The best way to start the process of building business credit is to maintain a physical office (not a PO Box!), obtain a local phone number and 411 listing, and secure a business license. After these steps have been taken, you can begin to build a credit score with business credit bureaus.

Mistake #2: Rushing the Process of Building Business Credit

Just as it took time to build your personal credit, so too does it take time to build good business credit. The goal for building credit is to get cash, but added to that goal is to get cash without a personal guarantee. The industry standard for building business credit and securing cash loans without personal guarantees is two to three years. Do not rush your ultimate goal.

Mistake #1: Using Personal Credit to Finance Your Business

The absolute biggest and most common mistake business owners make is using their personal lines of credit to finance their businesses. This includes paying business expenses with personal credit cards, “borrowing” money from personal savings and investment accounts, and securing personal loans to finance business expenses and expansions. This big mistake lowers your personal credit score because every lending inquiry into your credit history lowers your credit score; it reduces the amount of credit available for personal use because your debt-to-income ratio skyrockets. And should your business fail (as 95% do in the first five years, according to the Small Business Administration), you will be personally liable for all those “personal” loans. You do not have to risk your lifestyle for your livelihood.